Delphi Complete Works of Stephen Leacock, page 455
3. Modern Protective Tariffs. Acting on the general considerations thus stated, almost all of the modern industrial states have seen fit to adopt a system of protective duties for the promotion of domestic manufacture. Such legislation in the United States was indeed adopted in a mild form at the very opening of the history of the present Constitution. During the first half of the nineteenth century, the rival theories of free trade and protection struggled for mastery. The high tariff of 1828, the “tariff of abominations,” was followed by the greatly reduced tariff of 1846, a measure partly due to the influence of the free-trade campaign in England, and by the reciprocity treaty with Canada in 1854. But since the Civil War the system of protection to national industries has been strengthened, and extended to practically the whole range of industry. The Dingley tariff of 1897, while admitting free of duties a large number of raw materials for use in manufacture, imposed on manufactured articles duties amounting in some cases to more than fifty per cent. The Dominion of Canada, though granting a special rebate of one third of the duty to imports from Great Britain, is now on a high-tariff basis, the policy of protection having been explicitly adopted by the Conservative party in 1878, and transmitted to their opponents on their accession to power in 1896. The German Empire, since the tariff of 1879, has also adopted the policy of protection, the recent tariff of 1902 having further raised the existing duties, especially those on agricultural products. France, Italy, and the other Continental countries are also under a system of tariff protection. Of the manufacturing countries of the world, Great Britain alone remains upon a free-trade basis, while even there the future retention of such a system has recently become a subject of acute controversy.
4. Interference with Competitive Prices; Trust and Railroad Legislation. Interference with the freedom of importation is only one instance of the present tendency towards legislation in contravention of the formerly dominant theory of natural liberty. We have already seen that in accordance with this system it was considered advisable that prices should be left altogether to the play of free competition among buyers and sellers. It was presumed that under a régime of unrestricted competition, the price of any article would be in proportion to the cost of producing it. For the attainment of the maximum economic efficiency, and for the satisfaction of the demands of social justice, it seemed necessary merely to leave people alone to buy and sell as they pleased at such prices as they should arrange between themselves. The essence of the position, however, lay in the assumption that there would be active competition among a number of persons producing the same article. The case is altered if we suppose the entire stock of any particular commodity in the hands of a single seller, or what is the same thing, in the hands of a group of sellers acting in concert. Where a person has a monopoly of the available stock of a commodity, there is no reason, in and of itself, why he should sell it at a price representing the cost of production, rather than at any other price. He is free to ask any price that he likes, subject always to the consideration that if he asks too high a price no one will buy the article he wishes to sell. When we come to inquire how prices will in such a case be settled, we find that a monopoly price follows a law quite different from that governing prices under free competition. The adjustment of a monopoly price may be explained as follows. The seller obviously cannot sell below the cost of production, because that would entail a direct loss. He must, therefore, sell at a price somewhere above the cost of production. But it is clear that the lower the price the greater will be the number of articles that he sells. The whole amount of his profit will depend, therefore, on two factors, the total number of sales and the amount of profit on each sale. As the price rises the number of buyers decreases, though probably not in a regular progression, but irregularly and in a jolting fashion. There will be found somewhere in the upward scale a point of maximum profit, at which the product of the number of sales multiplied by the profit on each is greater than at any other point. Now this point may in some cases be far above the cost of production: for example, in the case of an article of prime necessity, — bread, sugar, oil, etc., — any one having a complete monopoly of the available stock could exact a price much in excess of the actual cost of production.
In the economic situation of the earlier part of the nineteenth century, the monopolization of articles of ordinary production had not appeared to any great extent. The law of price applying to these conditions, though apprehended by the economists of the day, assumed no particular importance, nor did it seem to have any immediate bearing on public policy. But in our own day the possibility of monopolization of ordinary articles of production has become a significant factor in the industrial situation. To this, various causes have contributed. The increasing use of machinery renders the initial cost of embarking on any industrial process constantly greater. The evolution of the principle of joint-stock undertakings has rendered it possible to carry on production on a very large scale, and in consequence to considerably reduce the cost of each article produced. This has rendered it very difficult for small concerns to compete with large industrial corporations, and has set up in the industrial world a tendency towards the amalgamation of similar businesses under a common management. When this amalgamation has proceeded far enough to cover, or at any rate to dominate, the whole production of a certain class of commodities, then the principle of competitive price-making no longer applies, and the law of monopoly price comes into play. To prevent this state of things modern governments have seen fit in some instances to use their legislative power. This is particularly the case with the United States, where the process of industrial amalgamation has been most rapid and has occasioned the greatest public apprehension. The federal government in 1891 passed an anti-trust law (known as the Sherman Act) forbidding contracts or combinations in restraint of interstate trade, prohibiting the monopolizing of any part of the trade between the states, etc. About half of the states have legislated against the trusts, either by constitutional provisions or by statutes. A great deal of such legislation has, however, been declared invalid by the courts, or rendered inoperative by various kinds of evasion.
A special case of the interference of the modern state in regard to prices is seen in legislation concerning railroad rates, which are of course prices charged for transportation of persons and freight. A little examination will show that railroad rates differ from most other prices in a very peculiar way. We have seen that under free competition in the production of ordinary commodities their selling price will approximate to the cost of production. Even where a single seller has a monopoly he will find no advantage in making sales below the cost of production. But in the case of a service performed by a railroad in transporting passengers or freight over a certain distance the “cost of production” is of a quite different character, and stands in a quite different relation to the price demanded. In the first place we can see that there is very little, almost no expense incurred by the railroad for the particular transportation of any single article. Supposing that a train is scheduled to run between two stations, ten miles apart, the cost of sending a barrel of flour on it (the additional expense, that is, actually incurred by taking that particular consignment) consists merely of the labor of two or three minutes’ handling and an infinitesimal quantity of extra coal by reason of the extra weight added to the train. It must be noted in the second place that as between a distance of ten miles and a distance of one hundred miles the cost is practically the same, for only the same amount of handling is needed, and the other expense is insignificantly small. There is of course the expense of running the train itself (coal, wages, etc.). Very obviously some of the prices charged for the passengers and freight it carries must make this good or the train is being run at a loss. But there is no reason (none, that is, of an economic character, and apart from ideas of sentiment, justice, etc.) why this charge should be levied in a proportionate manner upon the different consignments. Suppose, for example, that the state of the cotton trade is such that consignments of cotton will be sent even if the railroad charges a high price, and that the market for flour is such that no flour will be shipped except at a rate excessively low, it will clearly be to the advantage of the railroad to charge much for the one and little for the other. In other words each of these two rates will be of the nature of a monopoly price, the limitation of the charge being found in that above a certain point the number of consignments begins to fall off. Over and above the special expenses of running this individual train the railroad has to meet its permanent and standing expenses in the shape of the interest charge upon its original construction, and the cost of maintaining the roadbed and terminals. But there is no reason to assign these charges proportionately and uniformly among all the trains operated, and upon all the business handled. Each train and each consignment must of course repay the direct added cost which its operation entails. But above the extremely low minimum rate thus indicated, it is always worth while to accept business, even for a small charge where a larger cannot be had. In the practical levy of railroad rates it is therefore quite out of the question to distribute the total cost in a proportionate manner. Each service performed will be sold at a price representing “what the traffic will bear” and not what the traffic has cost. It will result in consequence that the different charges made by a railroad may be evidently and visibly out of proportion to their relative cost. It may happen that a greater charge is made for carrying a particular article a short distance than for carrying it a long one. Although at first sight this seems contrary to common sense and to common justice, it is quite in keeping with the principles we have just laid down. In transporting goods between two places five hundred miles apart a railroad may have to encounter the opposition of competing lines or of transportation by water, and may be compelled to accept a very low rate on the freight it carries. But at the same time there may very well be, included in this five hundred miles, a strip of one hundred miles which is not covered by any competing railroad, and which has not access to water transportation. As between the towns on this strip the charges that the “traffic will bear” are very likely greater than the utmost charge that can be levied on the through traffic of five hundred miles.
There is a further peculiarity in the economic situation of railroads in the fact that active and permanent competition between them is practically impossible. A state of keen competition induces the roads to reduce charges to a point which, while covering the actual and individual cost of the train service, makes no provision for the permanent interest and maintenance charges of the railway. In such a situation a poor road — particularly one whose interest charges are already in default, or which is even in the receiver’s hands — is a stronger competitor than a good one, for it can indulge in a more reckless and suicidal rate-cutting. In practice, therefore, railroads have always found themselves compelled to enter into agreements, express or tacit, as to the regulation of their rates. From the point of view of the general public such understandings look very much like a combined attempt on the part of the roads to exploit the community for their own benefit.
The distinctive position which the railroads thus occupy in the industrial world has induced all modern governments to subject them to special regulation, and to entirely abandon in reference to them the principle of non-interference. In some cases, as in Prussia, Austria, Hungary, the states of the Commonwealth of Australia, etc., the state itself owns and operates the railroads. In France charters are granted to private companies for limited periods, after which the roads revert to the state. The chief railroad systems of the country (some 20,500 miles of road out of a total 25,500) will become national property between the years 1950 and 1960. Even while the roads are in private hands their general relation to the state is very different from that of ordinary business enterprises. A large part of the original permanent cost was defrayed by the French government; the government also guaranteed the payment of a fixed dividend. In return the rates are fixed by the government itself, and the transportation of the mails, troops, prisoners, etc., is made gratuitous. In the United States, although the railroads have been left in private hands, they have been the object of special legislative control of both the state and the federal governments. The Interstate Commerce Act (1887) provides that in the case of charges levied on commerce between the states, no railroad company shall unduly discriminate in favor of particular persons or particular localities. The same law forbids the railroads to charge more for transportation for a shorter than for a longer distance over the same line, and prohibits the pooling of railroad earnings. The statute also establishes an interstate commerce commission of five members appointed by the President of the United States; it is the duty of this body to supervise the operation of the act, but it has no power of itself to punish violations of its provisions or to fix rates. The provisions of the federal anti-trust statute of 1891 have also been applied by the courts against the railroads in regard of various forms of combination that were presumed to be in restraint of commerce between the states. In addition to the national legislation most of the states have passed laws intended to prevent discrimination in freight and passenger rates, and to hinder undue combination. In most states also railroad commissions are established, in some cases with duties that are mainly advisory and statistical, but in others with coercive powers for the making and enforcing of rates. The Massachusetts board of railroad commissioners is an example of the first class; it supervises the operation of the law in reference to the issue of securities, receives reports from the railroad companies, and has an advisory power in regard to freight and passenger rates. In practice its recommendations have great force, and are usually followed by the roads themselves or embodied in statutes of the legislature. On the other hand, commissions such as those of Minnesota and of Illinois are given power to directly fix rates for traffic within the state. In the United Kingdom there is also a commission for the supervision of the operation of railroads, established in 1873, and rendered permanent by an act of Parliament of 1888. The schedule of maximum rates of each railroad is subject to the approval of the Board of Trade. Pooling is not prohibited, but discrimination is against the law.
